IG's trading wrap

Traders are still second guessing
whether the sizeable downgrade to the ECB’s growth and
inflation forecasts changes the underlying bid seen in
EUR/USD in recent times. We feel that it has certainly taken
a significant amount of wind out of the EUR sails and in
theory should see the pair underperform relative to other
risk-associated currencies in G10. Particularly the NZD,
given the RBNZ are focusing on the longer term and expect
growth to ‘accelerate to between 2.5% to 3% over the next
two years’.

EUR/USD respected and held the 38.2%
retracement of the November-December rally at 1.2949
yesterday. Perhaps this could be telling, and it could be
the platform for the single currency to march back above
1.30. Digging below the surface though, sharp moves in the
interbank market (EONIA) really saw traders stand up and
take notice. While the discussion on negative deposit rates
was not fully expected, we feel there’s little chance of
the bank imposing these rates.

That is until the monetary
transmission mechanism is functioning in a more healthy
manner, which in theory won’t happen until Spain requests
the OMT program. The double kicker Spanish bonds could get
if they request assistance from the ECB, who subsequently
impose negative yields, should cause money to fly away from
the ECB’s balance sheet into northern European debt and
potentially Spanish bonds, (given the debt would effectively
be underwritten), which in turn would push yields even
lower.

Some of those funds could even make their way into
the real economy, though a more likely home would be UK
gilts and US treasuries, in which EUR/USD heads to 1.25 on
the back of the sizeable outflows. German November
industrial production is due in upcoming trade. Given part
of the reason for the significant ECB downgrade was the
slowdown in core Europe, this print could actually have a
strong bearing on risk assets like EUR, equities and
commodities.

Asia is a sea of green, albeit modest, and
today it was the turn of Australia to lead from the front
with the market keen to run with momentum and bid up the
year’s winners. Perhaps this will be a trend that will
continue til the end of the year, but traders are continuing
to bid up healthcare and financials stocks, with both
sectors up over 1%. Buying the stocks with high yields has
been the equity trade of the year, and not only are you
getting paid (income) to be in a position, you also get the
double kicker of capital appreciation, something you just
wouldn’t have expected in early 2012. China is seeing
modest buying, which could be a sign that investors there
are hoping to see further signs of a recovery in this
Sunday’s data dump (CPI, PPI, fixed asset investment,
industrial production and retail sales).

We highlighted
the DAX yesterday and again the momentum this index is
displaying is incredible. To think it is already up 27% ytd,
despite negative yields on German bunds is astonishing.
Traders are almost hoping the index falls so they can get a
more attractive entry point to take part in the rally. The
French CAC is also looking very constructive and our call of
3617 will see the French market print a new high for the
year and suggests the bourse could then target the March
2011 low of 3693. US futures aren’t giving too much away
at present and while our out-of-hours clients have been
fairly subdued, the bias has been to buy thus far. US
payrolls are the highlight of course, and while the impact
of ‘Sandy’ may see poor numbers being shown an element
of leeway, the impact won’t have affected much more than
50,000 jobs, so there’s only so much this market will
forgive. A close above 1424 on the S&P (Mondays high and
61.8% retracement of the 1474 to 1343 move) would be
positive and suggest the index is ready to join its US
counterparts in trending higher again.

Ahead of the
European open we are calling the FTSE at 5913 +12, DAX 7558
+24, CAC 3617 +16, IBEX 7960 +50

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